The amount you realize from a sale or trade of property is everything
you receive for the property minus your expenses of sale (such as redemption
fees, sales commissions, sales charges, or exit fees). Amount realized includes
the money you receive plus the fair market value of any property or services you
receive.

If you finance the buyer's purchase of your property and the
debt instrument does not provide for adequate stated interest, the unstated
interest that you must report as ordinary income will reduce the amount realized
from the sale. For more information, see Publication 537.

If a buyer of property issues a debt instrument to the seller
of the property, the amount realized is determined by reference to the issue
price of the debt instrument, which may or may not be the fair market value of
the debt instrument. See Regulations section 1.1001-1(g). However, if the debt
instrument was previously issued by a third party (one not part of the sale
transaction), the fair market value of the debt instrument is used to determine
the amount realized.

You trade A Company stock with an adjusted basis of $7,000 for
B Company stock with a fair market value of $10,000, which is your amount
realized. Your gain is $3,000 ($10,000 – $7,000). If you also receive a
note for $6,000 that has an issue price of $6,000, your gain is $9,000 ($10,000
+ $6,000 – $7,000).

A debt against the property, or against you, that is paid off
as a part of the transaction or that is assumed by the buyer must be included in
the amount realized. This is true even if neither you nor the buyer is
personally liable for the debt. For example, if you sell or trade property that
is subject to a nonrecourse loan, the amount you realize generally includes the
full amount of the note assumed by the buyer even if the amount of the note is
more than the fair market value of the property.

You sell stock that you had pledged as security for a bank loan
of $8,000. Your basis in the stock is $6,000. The buyer pays off your bank loan
and pays you $20,000 in cash. The amount realized is $28,000 ($20,000 + $8,000).
Your gain is $22,000 ($28,000 – $6,000).

If you trade property and cash for other property, the amount
you realize is the fair market value of the property you receive. Determine your
gain or loss by subtracting the cash you pay and the adjusted basis of the
property you trade in from the amount you realize. If the result is a positive
number, it is a gain. If the result is a negative number, it is a loss.

You may have to use a basis for figuring gain that is different
from the basis used for figuring loss. In this case, you may have neither a gain
nor a loss. See
No gain or loss in the discussion on the basis of property you received as
a gift under
Basis Other Than Cost, earlier.

To figure your gain or loss when you dispose of mutual fund shares,
you need to determine which shares were sold and the basis of those shares. If
your shares in a mutual fund were acquired all on the same day and for the same
price, figuring their basis is not difficult. However, shares are generally
acquired at various times, in various quantities, and at various prices.
Therefore, figuring your basis can be more difficult. You can choose to use
either a cost basis or an average basis to figure your gain or loss.

If your shares were acquired at different times or at different prices and you
cannot identify which shares you sold, use the basis of the shares you acquired
first as the basis of the shares sold. In other words, the oldest shares you own
are considered sold first. You should keep a separate record of each purchase
and any dispositions of the shares until all shares purchased at the same time
have been disposed of completely.

Table 4-2 (on the next page) illustrates the use of the FIFO
method to figure the cost basis of shares sold, compared with the use of the
single-category method to figure average basis (discussed next).

You can figure your gain or loss using an average basis only
if you acquired the shares at various times and prices, and you left the shares
on deposit in an account handled by a custodian or agent who acquires or redeems
those shares.

To figure average basis, you can use one of the following methods.

Single-category method.

Double-category method.

Once you elect to use an average basis, you must continue to
use it for all accounts in the same fund. (You must also continue to use the
same method.) However, you may use the cost basis (or a different method of
figuring the average basis) for shares in other funds, even those within the
same family of funds.

You own two accounts that hold shares of the income fund issued
by Company A. You also own 100 shares of the growth fund issued by Company A. If
you elect to use average basis for the first account of the income fund, you
must use average basis for the second account. However, you may use cost basis
for the growth fund.

You may be able to find the average basis of your shares
from information provided by the fund.

Under the single-category method, you find the average basis
of all shares owned at the time of each disposition, regardless of how long you
owned them. Include shares acquired with reinvested dividends or capital gain
distributions.

Table 4-2 illustrates the use of the single-category method to
figure the average basis of shares sold, compared with the use of the FIFO
method to figure cost basis
(discussed earlier).

Even though you include all unsold shares of a fund in a single
category to compute average basis, you may have both short-term and long-term
gains or losses when you sell these shares. To determine your holding period,
the shares disposed of are considered to be those acquired first.

You bought 400 shares in the LJO Mutual Fund: 200 shares on May
14, 2009, and 200 shares on May 13, 2010. On November 10, 2010, you sold 300
shares. The basis of all 300 shares sold is the same, but you held 200 shares
for more than 1 year, so your gain or loss on those shares is long term. You
held 100 shares for 1 year or less, so your gain or loss on those shares is
short term.

How to figure the basis of shares sold.
To figure the basis of shares you sell, use the steps in the
following worksheet.

1.

Enter the total adjusted basis of all the shares you owned
in the fund just before the sale. (If you made an earlier sale of shares in this
fund, add the adjusted basis of any shares you still owned after the last sale
and the adjusted basis of any shares you acquired after that sale.)

$

2.

Enter the total number of shares you owned in the fund just
before the sale

3.

Divide the amount on line 1 by the amount on line 2. This
is your
average basis per share

$

4.

Enter the number of shares you sold

5.

Multiply the amount on line 3 by the amount on line 4. This
is the
basis of the shares you sold

You bought 300 shares in the LJP Mutual Fund: 100 shares in 2007
for $1,000 ($10 per share); 100 shares in 2008 for $1,200 ($12 per share); and
100 shares in 2009 for $2,600 ($26 per share). Thus, the total cost of your
shares was $4,800 ($1,000 + $1,200 + $2,600). On May 11, 2010, you sold 150
shares. The basis of the shares you sold is $2,400 ($16 per share), figured as
follows.

1.

Enter the total adjusted basis of all the shares you owned
in the fund just before the sale. (If you made an earlier sale of shares in this
fund, add the adjusted basis of any shares you still owned after the last sale
and the adjusted basis of any shares you acquired after that sale.)

$4,800

2.

Enter the total number of shares you owned in the fund just
before the sale

300

3.

Divide the amount on line 1 by the amount on line 2. This
is your
average basis per share

$ 16

4.

Enter the number of shares you sold

150

5.

Multiply the amount on line 3 by the amount on line 4. This
is the
basis of the shares you sold

The average basis of the shares you still hold after a sale of
some of your shares is the same as the average basis of the shares sold. The
next time you make a sale, your average basis will still be the same, unless you
have acquired additional shares (or have made a subsequent adjustment to basis).

The facts are the same as in
Example 1, except that you sold an additional 50 shares on December 17,
2010. You do not need to recompute the average basis of the 150 shares you owned
at that time because you acquired or sold no shares, and had no other
adjustments to basis, since the last sale. Your basis is the $16 per share
figured earlier.

The facts are the same as in
Example 1, except that you bought an additional 150 shares at $14 a share
on September 17, 2010, and then sold 50 shares on December 20, 2010. The total
adjusted basis of all the shares you owned just before the sale is $4,500,
figured as follows.

1.

Basis of remaining shares ($16 x 150)

$2,400

2.

Cost of shares acquired 9/17/10 ($14 x 150)

$2,100

3.

Total adjusted basis of all shares owned ($2,400 + $2,100)

$4,500

The basis of the shares sold is $750 ($15 a share), figured
as follows.

1.

Enter the total adjusted basis of all the shares you owned
in the fund just before the sale. (If you made an earlier sale of shares in this
fund, add the adjusted basis of any shares you still owned after the last sale
and the adjusted basis of any shares you acquired after that sale.)

$4,500

2.

Enter the total number of shares you owned in the fund just
before the sale

300

3.

Divide the amount on line 1 by the amount on line 2. This
is your
average basis per share

$ 15

4.

Enter the number of shares you sold

50

5.

Multiply the amount on line 3 by the amount on line 4. This
is the
basis of the shares you sold

In the double-category method, all shares in an account at the
time of each disposition are divided into two categories: short term and long
term. Shares held 1 year or less are short term. Shares held longer than 1 year
are long term.

The basis of each share in a category is the average basis for
that category. This is the total remaining basis of all shares in that category
at the time of disposition divided by the total shares in the category at that
time. To use this method, you specify, to the custodian or agent handling your
account, from which category the shares are to be sold or transferred. The
custodian or agent must confirm in writing your specification. If you do not
specify or receive confirmation, you must first charge the shares sold against
the long-term category and then charge any remaining shares sold against the
short-term category.

After you have held a mutual fund share for more than 1 year,
you must transfer that share from the short-term category to the long-term
category. The basis of a transferred share is its actual cost or other basis to
you unless some of the shares in the short-term category have been disposed of.
In that case, the basis of a transferred share is the average basis of the
undisposed shares at the time of the most recent disposition from this category.

You choose to use the average basis of mutual fund shares by
clearly showing on your income tax return, for each year the choice applies,
that you used an average basis in reporting gain or loss from the sale or
transfer of the shares. You must specify whether you used the single-category
method or the double-category method in determining average basis. This choice
is effective until you get permission from the IRS to revoke it.

If your account includes shares that you received by gift, and
the fair market value of the shares at the time of the gift was not more than
the donor's basis, special rules apply. You cannot choose to use the average
basis for the account unless you submit a statement with your initial choice. It
must state that the basis used in figuring the average basis of the gift shares
will be the FMV at the time of the gift. This statement applies to gift shares
received before and after making the choice, as long as the choice to use the
average basis is in effect.

Table 4-2. Example of How To Figure Basis of Shares Sold

This is an example showing two different ways to figure
basis. It compares the cost basis using the FIFO method with the average basis
using the single-category method.

Date

Action

Share Price

No. of Shares

Total Shares Owned

2/6/09

Invest $4,000

$25

160

160

8/7/09

Invest $4,800

$20

240

400

12/18/09

Reinvest $300 dividend

$30

10

410

10/1/10

Sell 210 shares for $6,720

$32

210

200

COST BASIS
(FIFO)

To figure the basis of the 210 shares sold on 10/1/10, use
the share price of the first 210 shares you bought, namely the 160 shares you
purchased on 2/6/09 and 50 of those purchased on 8/7/09.

$4,000 (cost of 160 shares on 2/6/09)

+

$1,000 (cost of 50 shares on 8/7/09)

Basis =

$5,000

AVERAGE BASIS (single-category)

To figure the basis of the 210 shares sold on 10/1/10, use
the average basis of all 410 shares owned on 10/1/10.

$9,100 (cost of 410 shares)

÷ 410 (number of shares)

$22.20 (average basis per share)

$22.20

× 210

Basis =

$4,662

When there is a sale, exchange, or redemption of your shares
in a fund, keep the confirmation statement you receive. The statement shows the
price you received for the shares and other information you need to report gain
or loss on your return.